Just as the stargate in the picture was a gate between two different dimensions (from the 1994 movie), today is also the stargate between planning and accounting. Accounting starts today and goes backwards in time in ever-increasing detail. Planning, on the other hand, starts today and goes forward in time in ever increasing summary and aggregation.
The catch that causes many misunderstandings is that the tables look very similar. Your accounting system produces an Income statement (alias Profit or Loss), a Balance Sheet, and a Cash Flow statement. A good business plan has at least the same three statements as “pro-forma” (meaning projected) statements. The form, presentation, and order of appearance of these financial statements are almost identical, but their information content is quite different.
Why do you care? Because the two concepts don’t mix well. And people who approach planning from an accounting point of view suffer. Accounting is reporting off of a database of transactions. Each transaction is recorded and kept, and the accounting sorts and selects and reports. Instead of guessing future monthly totals, they want to figure out an imaginary database of imaginary transactions, and then report results from them. They sweat, the suffer, they get digestion problems, and it doesn’t work.
Planning is to help steer the business. It helps with decisions, tracking progress, and managing change. Accounting is also for information and management, of course, but there are legal obligations related to taxes. Accounting must necessarily go very deep into detail. Planning requires a balance between detail and concept, because there are times when too much detail is not productive.
Accounting can never be wrong. It’s about taxes and governments and actual money transactions. Business plans, however, are always wrong, which is fine, because they’re about setting down assumptions so you can manage and track results, and steer the company. Steering is a matter of constant corrections. So is planning.
[…] links very nicely with my basic principle it’s planning, not accounting. Part of what blocks people from business planning is the misguided idea that the financial […]
[…] If your accounting summarizes categories for you – most systems do – consider using the summary categories in your business plan. Accounting needs detail, while planning needs summary. […]